Wichita Area Economic Outlook Conference October 1, 2009 Dr. Stanley D. Longhofer Director, WSU Center for Real Estate

 The recent housing market downturn has been unprecedented in the post-WWII era  Deep declines in: ▪ Existing home sales (-35% from peak) ▪ New home sales (-75% from peak) ▪ Construction (-80% from peak)  Nationwide in scope ▪ Past downturns have been regional

Source: National Association of Realtors

Source: U.S. Bureau of the Census

 In some ways, it wasn’t  While sales and construction have declined nationwide, price movements have varied across the country  Local market conditions drive local market outcomes  In this downturn, however, most local markets were heavily impacted by a “national” factor:  The relaxation and subsequent tightening of mortgage credit standards

Source: Board of Governors of the Federal Reserve System

 The average decline nationwide has been much smaller than most believe  Many markets (including most in Kansas) have continued to appreciate during the downturn  In the worst markets, existing home price measures probably overstate the true magnitude of value declines

Sources: FHFA and Standard & Poors -30% from peak -6% from peak

 Both indexes are designed to provide a “constant quality” measure of house price changes  Differences in the indexes:  Case-Shiller index is “value weighted”  FHFA index includes both home sales and mortgage refinancings  Case-Shiller index is heavily influenced by distressed sales  Case-Shiller index is biased toward large, coastal markets

Sources: WSU Center for Real Estate using data from FHFA and NAR –8% from peak –2% from peak –9% from peak

 43% of markets (166 out of 383) have seen prices increase over the past two years  Both Wichita and Kansas as a whole have seen modest appreciation over this time frame  Only 22 markets have seen price declines in excess of 30% over the past two years  Other than Las Vegas (41% cumulative decline), all of these markets are in California or Florida

 The markets with the largest measured price declines are markets with a large number of distressed sales  Poorly maintained properties  Lenders pressured to get REO off their books  Does a distressed sale really reflect the market value of non-distressed properties?

Source: “Recent Trends in Home Prices: Differences across Mortgage and Borrower Characteristics,” OFHEO Research Paper, August 2008 Homes in Central California that were purchased by high-risk borrowers have seen greater price declines than homes purchased by low-risk borrowers, holding all else constant.

 Measured by sales and construction activity, this real estate downturn is unprecedented in the modern era  Price declines, while widespread, have not been as deep as is popularly believed  With home sales and construction having fallen so far, should we expect a strong rebound when the markets recover?

Source: WSU Center for Real Estate using data from NAR and U.S. Bureau of the Census Historical Averages: KS = 46 US = 39

Source: WSU Center for Real Estate using data from U.S. Bureau of the Census Historical Averages: KS = 7 US = 10

Sources: National Association of Realtors and U.S. Bureau of the Census

 There is no reason to expect that sales activity will make a dramatic rebound  Sales are not abnormally “low”  Employment growth may be slow  Financial markets have not fully normalized  A new era of thrift?

 There is still excess inventory in many markets  There was clearly overbuilding in “boom” markets  Distressed properties are still supply on the market and compete with non-distressed homes  Construction activity will be especially slow  Irrelevant inventory doesn’t matter

 Prices have likely bottomed  Most markets never saw steep declines  The “worst” markets may rebound as distressed sales become less common  Remember: All real estate markets are local